In a remarkable fall from grace, the stock of Robinhood Markets (HOOD -1.76%) has collapsed 91% from its all-time high of $85 a share, which was set not long after it listed on the public markets in 2021.
The company was flying high thanks to Generation Z investors, who were mostly accessing the financial markets for the very first time, and used Robinhood as their stock trading platform of choice. Pandemic-related stay-at-home orders combined with trillions of dollars in U.S. government stimulus served as fuel for their ambitious investing journey.
But with social conditions and the economy slowly returning to normal, the lights appear to have gone out at Robinhood's party.
No shortage of challenges
Robinhood earns most of its revenue from transaction fees on stock trades (especially options trading). Traditional brokerages simply charge a commission every time a client places a trade, but Robinhood instead runs a zero-commission revenue model, which is funded by a controversial practice called payment for order flow (PFOF). It involves third-party market makers buying Robinhood's customer orders (order flow), and executing them at a slightly worse-than-market price, then pocketing the difference, known as the "spread."
The practice is under heavy scrutiny by the Securities and Exchange Commission (SEC). It lacks transparency because customers are unable to see exactly what PFOF is costing them, and in fact, the SEC found that Robinhood's clients were collectively $34.1 million worse off under the PFOF model between 2015 and 2018, compared to if they had paid regular commissions.
The model is incredibly lucrative for Robinhood, which earned two-thirds as much revenue as its competitor Interactive Brokers (IBKR 0.83%) in 2021, despite Robinhood's clients having less than a third of the asset value in their accounts, compared to Interactive's clients. Unfortunately for its bullish investors, Robinhood has struggled to maintain profitability since its positive earnings per share (EPS) of $0.01 in 2020, despite having the wind at its back during the volatile 2021 stock market conditions.
Now with investing activity broadly slowing down, the company is experiencing a consistent drop in transaction revenue each quarter, which will make it even harder to generate positive earnings.
The tide goes out
Most of Robinhood's key operating metrics peaked in the first half of 2021. While the present drop in overall trading volume is a marketwide phenomenon compared to that period, Robinhood's user base of younger investors appears particularly disinterested at the moment.
The company has now experienced four straight quarters of falling revenue per user, coupled with an active user base that continues to shrink.
In the first quarter of 2022, the result was a 43% plunge in total revenue year over year, to $299 million.
Not even a shift to offer trading in cryptocurrencies has reinvigorated Robinhood clients' appetite. In the second quarter of 2021, cryptocurrency trading revenue soared to $233 million, making up 51% of Robinhood's transaction revenue. But in the recent first quarter of 2022, that figure collapsed 76% to $54 million, or 24% of revenue.
Trending toward a value of $0
Robinhood's saving grace might be its balance sheet. The company has $6.2 billion in cash on hand, which affords it some time to tweak its business to rediscover growth. But investors don't appear eager to give Robinhood much rope.
The company's total market value stands at $6.3 billion right now based on its share price of around $7.34. It seems investors are only willing to pay a little over cash value for Robinhood, and are disregarding the rest of its business, which they're deeming to be effectively worthless.
To turn things around, Robinhood is trying to expand into new verticals with its cash card and its new cryptocurrency wallet. Additionally, it's working toward offering a 24-hour trading day, which would be a key differentiator.
But whether these initiatives can halt the decline in its user base remains to be seen. Robinhood will probably need several consecutive strong quarterly results before it wins back the trust of stockholders.
